Education and knowledge

Before I invested a single penny in anything other than a bank CD or a high yield checking account, I would take a significant amount of time to learn general investing lessons.

Specifically, I would read The Total Money Makeover to be sure I was in the right place to be considering investing, and then I would read the Sound Mind Investing Handbook. The SMI handbook is packed full of great introductory material to investing. If I can understand it, then you can understand it. In this stage a subscription to the Sound Mind Investing Newsletter can also give you access to tons helpful investing information.

During the education and knowledge stage, I would also try and find where I am on the risk temperament scale and learn about my personal investing weaknesses.

Index Funds, Mutual Funds, Bonds, or Single Stocks

Time period: 2 weeks

Key topics – What is the best method of investing for you? What asset allocation matches your goals, risk temperament, and time frame? Remember you goals is to set up a personalized investing plan.

In my retirement accounts, I own 100% mutual funds. However, you will need to set the allocation based on your personal preferences. The closer you are to retirement, the more important bonds become.

However, if I had to go back as a starting investor, I would go with Index funds. When you are just starting out, index funds leave the least amount of room for regret. At least you know you’ll never do much better or worse than the market.

Moreover, I’d avoid single stocks.

Decide between investment vehicles.

Time period 2 weeks

Key topics: What is the difference between a taxable and a non-taxable account? Which is better for me: a Roth IRA or a Traditional IRA? Does my employer offer a 401K match?

While there is going to be a lot of information to digest in a month, you should have a fair idea regarding your best investment vehicle.

Personally, I use a Roth IRA because I’m in a low tax bracket right now since I don’t make enough money. There is a good possibility that I will be in a higher tax bracket at retirement, so I’ll pay the taxes now.

Find an online broker or financial advisor.

I don’t use a financial advisor any more. I fired my financial advisor because of the excessive fees. That doesn’t mean financial advisors are bad, but I think as an investor who is educated, patient, and disciplined you can do a reasonable job selecting your own funds. If you do prefer to find a financial advisor there is nothing wrong with that.

Key topics: Check out TD Ameritrade, Fidelity, Charles Schwab, Vanguard, and First trade. Find out what their fees are for your investment vehicle (taxable or non-taxable account). What are their funds’ annual operating expenses? How much does it cost to buy and sell shares? What is their customer service like?

Just set up a spreadsheet with all of these columns and visit their sites to see what they are offering in terms of pricing.

If you decide to go with index funds, you can just find a brokerage that offers the lowest transaction fees. Vanguard is consistently mentioned as the best company in terms of ease of access, low fees, and product offerings.

Start today.

Time period: 1 day

At this point, you know what you need to know. You’ll try and convince yourself that you don’t know what you are doing. This may or may not be true. However, at this point you can only learn the rest of the stuff by just doing it.

Decide how much money you will invest on a monthly basis and set up automatic payments.

Most online accounts will allow you to tell them the amount of money you want taken from a designated bank account to be used to purchase a designated amount of shares.

To make things simple, I’d just have “x” number of dollars set to buy on the 1st of every month.

Dollar Cost Average.

If you follow the steps above, you are naturally doing this. Make sure that you contribute the same amount of money and purchase shares regardless of the share price.

Change nothing for 3-5 years.

I think individual investors are the greatest enemy to a healthy investment portfolio. If I had to go back, I’d get everything set up and pretty much ignore it. You’ll learn some great investing discipline, and you’ll also learn at lot about your true investing risk temperament.

Ignore any financial news or advice. Stay on your plan for 3-5 years.

Develop a personalized investing plan.

After investing for 3-5 years, you might decide to spice up your portfolio. Perhaps you want to increase risk in order to get a better return. With at least a few years of investing experience, you are in a better position to make some of those choices. I would never, however, put an entire portfolio at risk. Limit your exposure to 10-15%. If you are young your retirement planning should just be about starting and learning.

Remember that a simple investing approach will do wonders over your lifetime if you just leave it alone.

Comments

I agree, the first step a person should take is to get educated about how certain investments work by reading good books on the topic.

The only time I don’t avoid single stocks are when there are promotions available, such as commission-free trades, or a worthwhile sign-up bonus. Even then, I only put in a small amount of money so that I don’t put my entire portfolio at risk. Like you, the rest of my money is in mutual funds.

I do think some people can time the market and beat its returns if they get educated enough, but very few people, myself included, have the time or energy to do this. As you said, a simple approach can be a good approach for many people.
.-= Darren´s last blog ..Want An Automatic Raise? Contribute To Your 401K! =-.

Thanks for the great step-by-step process. I am currently paying down debt, once free from debt, I am looking back at this post to start us up on the process. There are so many opportunities out there it can be overwhelming!
.-= Ted´s last blog ..Boo to credit card companies =-.

First step…you hit it on the head…educate yourself…you should never invest in something you don’t understand. Good post.
If someone doesn’t want to educate themselves, then a good financial advisor (ask for references, whom do your friends recommend) can know where to start. Good job.

Sound advice. What’s important is to not stop learning. Educate yourself before working with a financial advisor. And even if you work with the right one, make sure that the decision is coming from you, not from someone else.

Greetings,
Those putting their hard earned money at risk in any investment should first educate themselves extensively. I did not do this and placed my confidence in a money manager who lost half of my investment capital. I decided to educate myself and do my own investment. My education paid off. There is no mystery to money management but understanding the movements of markets is essential. Leaving your investment capital untouched for 3-5 years is a sure method to achieve minimal returns. In 2007 the SP500 index was at 1576 for a high. Five years later the SP500 has not recovered to that level. There are numerous financial vehicles available to achieve your goals. You must discover them. Find someone that can mentor you and you will save valuable time and resources. Returns of 3 to 5 % a week are readily available to those who have the desire to learn. Consider investing in your education by attending the local library for books on investing in stocks, options, Exchange traded funds and similar ideas. You can achieve this with a little study. My other advice is completely ignore the stock market commentators. News is generally based on past events and of little value to you as an investor. By the time you receive their comments the market has changed and their advice is old. If there is a stock club in your area, join and listen to others who have successes and failures. If they are successful, see if they will teach you their methods. Most investors are willing to share.
If there is no club, consider starting one. You might be surprised how many people have
an interest similar to yours.
God Bless you in your efforts.